Foreign company to Loan money to UK company

What are tax and regulatory implications

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A client has got money in a bank account in a company account in Pakistan where he is no longer residing. He wants to transfer that money to fund his UK investment company. He is considering Lending money to his own company in UK and using that money for investments. Considering this is a bit complicated as it involves borders. I wanted to know what would be the regulatory and Tax implications for the client in this?

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By Paul Crowley
15th Apr 2024 08:40

I would equally concerned with UK AML issues.

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By nrw2
15th Apr 2024 09:36

You'll need to speak to a Pakistani advisor re that side of things and there's the Corporate Interest Restriction to consider on the UK side, amongst other things.

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By paul.benny
16th Apr 2024 08:47

Client's UK bank may well query large incoming receipts from Pakistan. There may also be local restrictions on outgoing funds.

You should certainly do enhanced due diligence on the sources of the funds and all of the parties. This could be an attempt to launder dirty funds.

If you're satisfied this is clean, a loan may not be the most tax efficient way of extracting cash. If it is a loan, you need to consider currency and interest rate as well as fx risk. UK entity may fall outside transfer pricing rules in UK but needs to be considered in Pakistan.

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Replying to paul.benny:
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By 3bgk6wok
16th Apr 2024 08:52

Thanks for the helpful comment.

Will certainly do enhanced due diligence as AML is no joke. Regarding your comment of this not being the most tax friendly way. Could you advise on what other tax efficient way to this situation?

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Replying to 3bgk6wok:
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By paul.benny
16th Apr 2024 11:26

3bgk6wok wrote:
Regarding your comment of this not being the most tax friendly way. Could you advise on what other tax efficient way to this situation?

No.
I'm not a tax specialist, and know nothing about Pakistani tax. Client's adviser in Pakistan is best place to comment - and to take account of Client's wider circumstances and longer term intentions.

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By taxdigital
16th Apr 2024 09:35

First with the admin part: as suggested above, whilst Pakistan is no more listed as a high risk country by FATF, enhanced due diligence is still advisable. I think our list now follows the FATF list (https://www.legislation.gov.uk/uksi/2024/69/regulation/2/made)

On to your questions:

3bgk6wok wrote:

A client has got money in a bank account in a company account in Pakistan

What is the source of this money? If it's their own company whilst being tax resident in the UK, then that would mean looking up all the anti-avoidance legislation. And if the client's non-domiciled in the UK and claiming remittance basis of taxation then that opens up yet another front.

3bgk6wok wrote:

He wants to transfer that money to fund his UK investment company.

This means extracting money from his company in Pakistan, which means complying with the local laws, paying tax etc. Generally, some Asian countries have strict controls on outward fx remittances.

3bgk6wok wrote:

He is considering Lending money to his own company in UK and using that money for investments.

That may be the easier part once the other issues have been resolved.

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Replying to taxdigital:
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By 3bgk6wok
16th Apr 2024 09:44

The source of money is said to be sale of properties which were owned by the client. There is documentary proof of the sale proceeds. The money was then used to fund the company in Pakistan.

You are absolutely right with the restrictions on FX in Pakistan. It's quite complicated there.

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Replying to 3bgk6wok:
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By taxdigital
16th Apr 2024 10:01

3bgk6wok wrote:

The source of money is said to be sale of properties which were owned by the client. There is documentary proof of the sale proceeds.

Is the individual tax resident in the UK? If yes, did he pay UK tax on this transaction? If not then why not? Is he claiming remittance basis of taxation? If remittance basis then we need to discuss several chapters of the tax legislation starting with 'clean capital', 'cleansing', s.16ZA TCGA 1992 for foreign loss relief etc . Of course, FTCR, tax treaty provisions etc will be in point.

3bgk6wok wrote:

The money was then used to fund the company in Pakistan.

if the individual is tax resident in the UK. and the company is managed and controlled from the UK, start with ToAA legislation.

Sorry 3bgk6wok, I need to leave it there.

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